Risk and volatility: What do they mean when investing?

Posted on October 31st, 2019 | Categories - Investments, News

When you’re investing risk and volatility are terms that come up often. But what do they mean for your investment performance and should they have an impact on your decisions? We explain what the terms mean and what to consider as you make investment decisions.

First, whilst it can seem like the terms ‘risk’ and ‘volatility’ are used interchangeably, they do have different meanings and effects on your investments. Understanding the difference is important for calculating which investments match your goals and comfort level.

Risk: This refers to the probability that an investment will result in a loss of capital. Typically, higher-risk investments will have higher potential rewards. However, you’ll need to weigh up how likely it is you’ll lose some or all capital by taking the associated risk.

Volatility: This refers to how the values of investments fluctuate. In the short term, values will rise and fall due to a whole host of factors. This is the reasons it’s advised you don’t invest capital you’ll want access to in the short term, as you’re more likely to be affected by dips in the market.

Both risk and volatility should be considered when making investment decisions, as they can have an impact on outcomes and which investment options are most appropriate for you.

How do risk and volatility affect investment decisions?

When talking about what to consider when investing, risk is one of the most common areas that’s looked at. All investments come with some level of risk. However, this varies significantly between investment opportunities and asset classes. As a result, you should carefully consider what level of risk you’re comfortable with and how this relates to your overall financial goals.

Typically, the higher the risk, the greater the potential returns. For some investors, taking a greater level of risk is worthwhile when the potential returns are considered. For others, a more conservative approach better suits them. However, it’s not just how comfortable with investment risk that you should consider but your wider financial circumstances. Among the questions to consider are:

  • What impact would a financial loss have?
  • What are your investment goals?
  • Do you have other assets that could make up a shortfall?
  • What other investments do you have in terms of risk?

With that in mind, you should also factor in volatility when making investment decisions. Increased volatility means investment values are more likely to rise and fall, sometimes by significant amounts. As a result, timeframe plays a key role in how volatility affects your investment decisions.

As a general rule, you shouldn’t invest with a timeframe of fewer than five years in mind. This gives you a chance to ride out the peaks and troughs. When you look at investment performance over the long term, you’ll hopefully see the bumps smoothed out to deliver a gradual increase.

Get in touch

Do you know how your investment portfolio aligns with your goals and overall attitude? If you’re unsure or your circumstances have changed since your last review, assessing investments with the bigger picture in mind can help you stay on track.

We’re here to help you consider what your capacity for risk is and how this relates to your overall financial goals. What’s more, we can explore how volatility may affect your financial situation. Throughout the process, our goal is to give you confidence in your investment portfolio and how it’ll help you towards aspirations. If you have any questions, please get in touch.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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